A Wide Variety of Products Can Provide Funding for Your Business
By: Kate Samano March 7, 2022There’s never been a better time for a business to search for financing, particularly for those with limited operating histories, bad credit or low cash reserves. Historically, these types of companies would be denied for loans by traditional bankers, but now they have access to a vast array of alternative financing methods. Whether you’ve been denied a business loan by a traditional bank or are just starting to explore the types of available financing, it pays to know what’s out there and what might be the best fit for your business.
What Are Common Types of Business Financing?
Each of these financing methods has its pluses and minuses and might or not might be the right choice for your business. That’s why it’s important to work with a specialized service provider like Lendzi, who can connect you with the best financing option for your particular business, rather than trying to go it on your own. However, as a business owner, you should also do your own homework and be aware of what each of these options means. Here’s a brief overview to get you started.
Merchant Cash Advance
A merchant cash advance is essentially an advance loan against your future sales. Rather than having traditional fixed payments and maturity dates, a merchant cash advance takes an agreed-upon percentage of your daily sales until your obligation is paid back in full. Since the MCA is basically collateralized by your cash flow, it’s a good way for businesses with low credit ratings – that might otherwise be denied for a loan – to get an immediate cash infusion. However, this type of financing is often relatively expensive, and you’ll need to show consistent cash flow to get approved.
Business Equipment Loan
If you’ve got your general purpose financing figured out but don’t have any capital for the tools and machines that will produce your product, a business equipment loan might serve your needs. These function just like traditional business loans, except the proceeds must be earmarked specifically for business equipment. Typically, you can use these types of loans to either buy or lease your equipment, as best suits your needs. Best of all, you’re more likely to get approved for this type of loan because it will be collateralized by the equipment you buy or lease.
SBA Loans
The U.S. Small Business Administration doesn’t issue loans directly, but it does work to match lenders and businesses via guarantees of repayment. These guarantees entice lenders to participate in the program, offering a wide range of desirable loans with relatively low interest rates. The problem with SBA loans is that they can be difficult to get, and most are backed by a personal guarantee by the business owner. This means if your company defaults, you may be personally liable to pay the loan back.
Equity Financing
Equity financing is one of the main ways that public companies generate working capital, by selling shares of stock to investors. If you’re a new company struggling to get financing, diluting your company ownership a bit to raise needed funds can be a good way to go. But if you’re already gone through numerous financing rounds and additional equity financing could cause you to lose control of your company, you might want to pick a different option.
Debt Financing
Debt financing is another way that firms on Wall Street raise capital for their businesses. With debt financing, you’ll borrow money from investors in exchange for the promise of regular interest payments and return their capital at the end of a specified term. If your company has consistent cash flow and will have no problem making the required interest payments, debt financing can be a relatively low cost way to raise funds, particularly if you have a good credit rating. But if you’re a seasonal business, for example, you might not have the cash flow to make your payments and are setting yourself up for default.
Small Business Credit Cards
Generally speaking, a credit card isn’t a very good way for a business to obtain financing. However, if your company has good credit and can secure a 0% interest rate for a period of time, such as 12 or 18 months, a small business credit card may be an optimal way to pay the bills. You won’t have to deal with onerous loan approvals, the 0% interest rate is as low as you could get anywhere else, and you may even earn sign-up or earnings bonuses that could prove valuable. But if there’s the slightest bit of risk that your company won’t generate the necessary cash flow to pay off the loan over a short period of time, then the downside could be tremendous, as high double-digit interest rates could kick in on your balance.
About the Author
Kate Samano
Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.